Debt Issuance Research Articles

Institutional investor horizons, information environment, and firm financing decisions

We provide evidence that the investment horizons of institutional shareholders affect firms’ financing decisions. We find that short-term institutional ownership positively affects firms’ likelihood of equity relative to debt issues, the size of equity issues, and the likelihood of long-term relative to short-term debt issues. Firms held more by short-term institutions have lower financial leverage and longer debt maturities. These results suggest that short-horizon institutions, backed by buy-side research, improve the transparency of the information environment, which allows firms to issue more information-sensitive securities. Our findings suggest that institutional investor horizons influence firms’ financing decisions by shaping their information environment.

Software Maintainability and Refactorings Prediction Based on Technical Debt Issues

Software maintainability is a crucial factor impacting cost, time and resource allocation for software development. Code refactorings greatly enhance code quality, readability, understandability and extensibility. Hence, accurate prediction methods for both maintainability and refactorings are vital for long-term project sustainability and success, offering substantial benefits to the software community as a whole. This article focuses on prediction of software maintainability and the number of needed code refactorings using technical debt data. Two approaches were explored, one compressing technical debt issues per software component and employing machine learning algorithms such as ExtraTrees, Random Forest, Decision Trees, which all obtained a high accuracy and performance. The second approach retained multiple debt issue entries and utilized a Recurrent Neural Network, although less effectively. In addition to the prediction of the requisite number of code refactorings and software maintainability for individual software components, a comprehensive analysis of technical debt issues was conducted before and after the refactoring process. The outcomes of this study contribute to the advancement of a dependable prediction system for maintainability and refactorings, presenting potential advantages to the software community in effectively managing maintenance resources. Of all the employed models, the ExtraTrees model yielded the most optimal predictive outcomes. To the best of our knowledge no other approaches of using ML techniques for this problem have been reported in the literarture. Keywords and phrases: Software Quality, Sonarqube, Refactoring, Code Smells.

Land financialization and debt expansion: Evidence from city–county mergers in China

This paper discusses the “land-debt” financing pattern in China in the context of local governments under fiscal pressure and analyzes the development and economic effects of land financialization. Using a difference-in-differences approach based on the exogenous shock of city–county mergers, we find that city–county mergers significantly boost local governments' debt issuance, causing land financialization. City–county mergers relax land resource constraints on local governments, increasing land held by local government financing vehicles (land mortgages) and land transfer revenue (land guarantees). Accordingly, it is as such an impact mechanism rather than a fiscal pressure that mainly leads to debt expansion. We also document that this effect is more pronounced in China's central and western regions, where land is more correlated with local economies; in periods when the central government does not regulate local land financing; and in areas where officials have strong promotion incentives. Further analysis reveals that most of the debt funds raised by city–county mergers are used for infrastructure construction and loan repayment, and the increasing debt risk of local governments should also be a matter of concern.

Partisan conflict and corporate credit spreads: The role of political connection

This paper documents the positive impact of partisan conflict on corporate credit spreads for politically connected companies and industries. The effect is both economically meaningful and statistically significant, stands under an extensive set of control variables, and is stronger for speculative-grade bonds. Several approaches are adopted to resolve endogeneity issues and further establish causality. Partisan conflict affects corporate credit spreads through a discount rate channel, increases investors’ risk aversion, and leads to higher borrowing costs and widening credit spreads. Affected companies respond by reducing debt issuance and postponing investments until the conflict subsides.

International evidence on extending sovereign debt maturities

Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance by examining the extension of the maximum maturity of issued debt. In particular, we are interested in the potential costs to the U.S. Treasury of introducing 50-year bonds as a financing option. Therefore, we first examine international evidence from four developed foreign government bond markets with such long-term debt. The results show that 50-year bonds in these markets trade at an average yield that is at most 20 basis points above that of 30-year bonds. Results based on extrapolations from a dynamic yield curve model using just U.S. Treasury yields are similar.

The Effects of Profitability and Debt-To-Equity Ratio on Operating Leverage

The aim of this study was to analyze the effects of profitability and debt-to-equity ratio on operating leverage in the case of companies listed on the Korea Exchange from 2000 to 2021. The analysis showed that the profitability and debt-to-equity ratio of companies in Korea rose with increasing operating leverage (fixed costs), and it is worth noting that a company’s cost structure affects its capital structure. There was a positive correlation between profitability and debt-to-equity ratio for Korean firms, which means that their capital structure can be explained by the pecking order theory. That is, the more profitable a company is, the more it prefers to raise funds through debt issuance rather than equity issuance. In the case of Korean companies with a relatively high dependence on debt, the increase in operating leverage for facility investment among other business activities mostly expands debt, and the higher the profitability, the higher the debt-to-equity ratio is.

Parameterizing Debt Maturity

AbstractWe examine ways to describe the maturity structure of public debts using few parameters. We compile a novel data set of all promised future payments for U.S. and UK government debt from every month since 1869, and more recently for Peru, Poland, Egypt, and Nigeria. We show there is a unique parametric form which does not arbitrarily restrict debt issuance. We use this model to parsimoniously describe the evolution of public debt maturities and to characterize the relationship between maturity and the term structure of interest rates in the United States since 1940.

The Ordered Weighted Average Sector Liquid Return Index: A Method for Determining Financial Recovery from Sectoral Debt

The primary aim of this article is to demonstrate that using the average of ratios as a representative value for measuring the health of a sector does not constitute a valid procedure. After mathematically demonstrating this objective, the article will then focus on introducing a new index for estimating the potential debt return value for a sector or group of companies. Next, the article details the start of the process for creating a new index to improve investors’ understanding of the risk associated with a sector or a group of companies meeting short-term obligations based on assigned probabilities of future sales. Given that said value is intended to represent an indicator of expected liquid solvency, its construction will take treasury tensions into account. An Ordered Weighted Average type of aggregation function is used to aggregate the magnitudes in this scenario. Consequently, the second objective of the present work is the creation of this index, which provides an initial estimate of how much money can be recovered from a sector’s debt.

Dynamic debt issuance with jumps

Dynamic debt issuance with jumps

Understanding local government debt financing of infrastructure projects in China: Evidence based on accounting data from local government financing vehicles

This study develops an analytical framework to investigate the complex relationship between local government debt issuing for infrastructure financing, state control, land finance, and development activities in the private sector in China. Using local government financing vehicles’ accounting data, we find that local governments are working creatively to meet infrastructure development targets handed down by the central government. Moreover, local government financing vehicles became more responsive to development activities from the private sector in their debt-issuing decisions after the regulations of local government debt issuing in 2013/14. By modelling the effect of three distinct forces, i.e., the central government, local governments, and the market, in one unified framework, our study provides reliable evidence of how infrastructure financing works in China. Our research extends the studies of land finance into the infrastructure development domain. The findings are also helpful for studies on China's land use policy under its leasehold land right system, particularly the impacts of different land planning uses on infrastructure development.

The Debt Problem of Evergrande

Evergrande Real Estate Group Co., Ltd. was once a leading enterprise in China's real estate industry and one of the Fortune 500 companies. However, in the past few years, Evergrande fell into a huge debt crisis and was on the brink of bankruptcy. Although with the joint efforts of the leaders and employees of Evergrande Group, all core assets of Evergrande Group have been preserved, which allowing the company to continue normal operations. But the debt issue remains the biggest problem for Evergrande Group. This study conducted a survey and analysis based on the performance of Evergrande over the past 30 years, attempting to identify the reasons for Evergrande's two trillion yuan debt crisis. Based on the theories of economists and entrepreneurs' experiences, a solution to Evergrande's debt crisis can be integrated. This study will conduct a detailed analysis of the three main causes of Evergrande's debt crisis, including high leverage profit model, diversified development, and excessive dividends. The author will collect resources through online search, book browsing, and interviews with professionals, and then present them in the form of papers.

ESG, financial constraint and financing activities: A study in the Chinese market

AbstractThis paper investigates the impact of Chinese firms' environmental, social, and governance (ESG) performance on their financial constraint and financing activities. We find a negative association between firms' ESG performance and their financial constraint driven by the Chinese government's commitment to tackling climate change. Compared with state‐owned enterprises (SOEs), non‐SOEs have alleviated their financial constraint through both equity and debt issuance, thanks to the stock price appreciation and green credit. High‐pollution firms benefit from both equity and debt issuance, while low‐pollution firms mainly finance through equity issuance. Our findings demonstrate the leading role of the Chinese government in its domestic capital markets.

Sovereign Debt Puzzles

We review the state of the sovereign debt literature and point out that the canonical model of sovereign debt cannot be easily reconciled with several facts about sovereign debt pricing and servicing. We identify and classify more than 20 puzzles. Some are well-known and documented, others are less so and are sometimes based on anecdotal evidence. We classify these puzzles into three categories: puzzles about how sovereigns issue debt; puzzles about the pricing of sovereign debt; and puzzles about sovereign default and the working out of defaults. We conclude by suggesting possible avenues for new research aimed at reconciling theory with what we observe in the real world.

To play or not to play the ‘moral hazard card’: Germany and the European Union’s response to the Covid-19 crisis

ABSTRACT Avoiding moral hazard is a recurrent argument of those seeking to limit the development of European financial support mechanisms. Germany has been the traditional leader of this coalition of actors in the European Union (EU). However, in reaction to the Covid-19 pandemic, Germany supported an EU response which included grants and massive debt issuance. What was previously presented as unacceptable – because of moral hazard – became appropriate. This contribution seeks to explain why the German government ceased to emphasise the moral hazard problem in EU economic governance. We argue that the answer is not because of a challenge to the relevance of moral hazard per se, or because the Germans lost interest in the moral hazard problem, but rather because German policymakers were discursively constrained by one of the dominant meanings of moral hazard they had previously imposed – which lost its relevance in the context of a symmetric exogenous shock.

Gender Social Bonds in the Latin American Market

Although issuances of sustainable debt are growing worldwide, there is a lack of studies that allow a better understanding the social bond issuances, particularly those with a gender focus, which are directly related to the achievement of the Sustainable Development Goals 5, 8, 9, and 10. This study addresses the identified knowledge gap by examining the overall state of the gender social bonds in the Latin American market between 2019 and 2022. The results revealed that a total of USD 1 billion was issued by 12 issuers conducting 14 issuances across six countries. Also, most issuances were financial corporations (58.4%) and supranational banks had a pivotal role in this market by being buyers and/or lead managers. As the first study conducted on this topic, this represents a milestone in sustainable finance research. Finally, this study will allow policy makers, regulators, and researchers to promote the issuance of gender social bonds.

Identifying the severity of technical debt issues based on semantic and structural information

Identifying the severity of technical debt issues based on semantic and structural information

Financing local public projects

This paper studies the financing of local public projects. The setting is a community with durable housing, undeveloped land available for new homes, and population turnover. The community invests in a public project that may be financed with a mix of a tax on current residents and a debt issue. The paper shows that financing with a debt–tax mix is equivalent to pure tax finance coupled with a tax on future development whose proceeds are shared by future residents. This result has three implications. First, Ricardian Equivalence holds if and only if there would be no future development were the project purely tax financed. Second, when Ricardian Equivalence does not hold, the optimal debt level is such that the associated tax on development appropriately internalizes the negative externalities from this development. Third, when Ricardian Equivalence does not hold, the debt level preferred by current residents will be higher than optimal.

The role of environmental, social, and governance rating on corporate debt structure

This paper examines the impact of Environmental, Social, and Governance (ESG) rating on a firm’s debt structure. We find that optimal (market and book) leverage ratios and information asymmetry are reduced when firms become ESG rated. More importantly, ESG rated firms redistribute their financing sources from public debt (bonds issuing) to private debt (bank loans). These results are attributed to the incentive of ESG rated firms to avoid debt-overhang and underinvestment issues and to the fact that the ESG rating conveys valuable information to lenders leading to better access towards more internal sources of financing, such as bank loans over debt issuing. We further find that the substitution effect is more pronounced for firms with high financial pressure, low growth opportunities and specialized assets. Finally, these results remain valid under various robustness and endogeneity tests.

Coping with extreme events: on solving decentralised budgetary crises

ABSTRACT Extreme events create both macroeconomic and budgetary problems for decentralised governments. Decentralised governments are unequipped for macroeconomic stabilisation policies and have very limited fiscal space. At a practical level there are three options to replace lost funding from an extreme event: decentralised governments can anticipate and save for these budgetary rainy days themselves, they can issue debt, or the central government can step in and provide aid when such extreme events occur. This paper examines the impact of these options on the unemployment rate. Using the 2008 financial crisis as an extreme event and employing a panel data approach, it is found that both grants and rainy day funds during the crisis reduced future unemployment on the margin relative to periods outside of the crisis; the same is not true of debt. It is also found that grants and rainy day funds are substitutes: greater grant funding implies a somewhat smaller effect of own savings on future unemployment.

Debt policy in Spanish America during the seventeenth century

This paper analyzes the policies that the Castile of the seventeenth century followed toward creating and selling short-term and long-term debt paid off from the Crown's New World revenues. We use microdata to reconstruct comprehensive fiscal accounts for Spanish America during the seventeenth century. Our new time series evidence shows that the Spanish Empire maintained differential debt policies in the center and the periphery. Spanish America issued considerably less debt, more credible than coetaneous Castilian debt. However, the issuances’ size did not reflect lower debt capacity in the New World, as the Spanish Empire restrained long-term debt issuance to emergencies. We also provide complementary evidence from debt issuances and explain why differential debt policies were maintained.